Please enjoy ARK Disrupt Issue 63. This blog series is based on ARK Brainstorming, a weekly discussion between our CEO, Director of Research, thematic analysts, ARK’s theme developers, thought leaders, and investors. It is designed to present you with the most recent innovation takeaways and to keep you engaged in an ongoing discussion on investing in disruptive innovation. To read the previous issue, click here.
1. Facebook Is Cannibalizing Snapchat’s Features and Functionality
Last month, FacebookFB incorporated a feature similar to Snapchat’s Stories format into both Facebook and Instagram. This week, TechCrunch reported that Facebook is extending the feature to WhatsApp, a messaging app popular in Europe, Asia, and much of the developing world. With 1.2 billion monthly active users, WhatsApp dwarfs Snapchat’s 158 million daily active users and continues to grow users at a ~6% quarter over quarter rate, as shown below. Meanwhile, we believe Snapchat’s user growth has decelerated to 3% on the same basis thanks primarily to increased competition from Instagram.
Interestingly, Facebook’s latest move suggests that WhatsApp may have stumbled upon a business model. Currently WhatsApp has no advertising and is free to use. Stories lends itself naturally to advertising, especially lucrative video advertising. Ironically, while many analysts view it as a potent threat to WhatsApp, Snapchat may have inspired Facebook with a new model to monetize its constellation of apps.
2. Could Auto Loans Be The Next Financial Casualty?
Historically, we think auto loans have been a good credit risk, even during the great financial crisis. Throughout 2008 and 2009, our research shows that consumers prioritized auto loan payments over mortgage payments, placing a high value on transportation to places of work and day-to-day errands. Vehicles were easier than homes for banks and others to repossess, so car and homeowners responded accordingly. As a result, auto loan delinquencies peaked in the low single-digits while those for single family homes soared to the 11-12% range.
Why, then, is it ominous that auto loans have increased steadily since 2010, as shown below? First, ARK expects that auto owners increasingly will neglect car payments in tough times as they default to “pay as you go” ride sharing services, including autonomous taxi networks. Second, because vehicles typically serve as the collateral for auto loans, ARK anticipates that during the next recession used car prices will collapse, impairing the residual value of new cars as ride sharing services and autonomous taxi networks gain traction. Third, while Uber is beginning to lease cars to its drivers, expecting them to satisfy lease payments by committing to a certain number of ride sharing trips, ARK expects autonomous taxi networks to disrupt ride sharing in the same way ride sharing disrupted the taxi industry.
Within the past year, for example, the percentage of nonperforming Taxi Medallion loans on Capital One’s books has soared from 20% to 50%. As autonomous taxi networks evolve, Uber drivers probably will not find enough rides to pay for their vehicles, suggesting that current auto loan rates are much too low given the default risk that is brewing.
Source: Federal Reserve Bank of New York
3. Does Zelle Pose A Threat To Venmo’s Peer-to-Peer (P2P) Payments Platform?
Venmo has become the payment platform of choice for millennials and other young customers who want to split rent, bills, and purchases with their friends…while at the same time communicating with emojis and other messages. Consequently, payments on Venmo’s platform have more than doubled during the last year, accruing to the benefit of its parent company, PayPal.
Source: PayPal Investor Update
Now banks are trying to replicate Venmo’s P2P platform with a new payment app called “Zelle”. Including Bank of America, Citi, and Chase, 19 banks have signed up for Zelle, which will serve as a white label mobile application or a stand-alone Zelle mobile application. Either way, Zelle will offer banks the opportunity to integrate and scale P2P transactions with a sleek and intuitive interface for users.
In our view, Venmo has unique characteristics that could tip the scales in its favor. Most important are its brand (“Venmo me”) and its strong network effect, thanks to the social dimension it has added to transactions.
While P2P is in early days, many financial institutions are strategizing about ways to take it from millennials to mainstream. Ultimately, P2P payments platforms could eliminate cash and its inefficiencies from our day to day transactions.
4. DNA Cytosine Methylation And Nanopore Sequencing: Research Continues to Crack The Code Of Cancer
DNA methylation “refers to the presence of a biochemical group attached to a nucleotide.” Research has shown that epigenetic changes such as DNA methylation “act to regulate gene expression in normal mammalian development.” Disruption of these processes can alter the function of genes and cause “malignant cellular transformation.”
According to Shikhar Sharma, as quoted in the Oxford Journal Carcinogenesis, “global changes in the epigenetic landscape are a hallmark of cancer. The initiation and progression of cancer, traditionally seen as a genetic disease, is now realized to involve epigenetic abnormalities along with genetic alterations.” In other words, DNA methylation has “shown extensive reprogramming” of the epigenetic machinery in cancer.
An article published in the journal Nature Methods this week outlines a new method for the detection of DNA cytosine methylation. In the paper, Simpson et. Al used a nanopore sequencing device – in this case the Oxford Nanopore Technologies MinION sequencer – to sequence the methylome of human DNA. Nanopore sequencing devices use electrolytic current signals that are sensitive to base modifications. The goal of the experiment was to “develop a method to directly detect DNA modifications, in this case 5-mC, based on only the electrical readout of the” MinION device, using a trained hidden Markov model (a form of machine learning) to distinguish the 5-mC from unmethylated cytosine.
The result of the experiment was that 5-mC “can be identified by sequencing DNA with the MinION instrument, at up to 95% accuracy using stringing calling thresholds and the most recent pore chemistry.” The experiment examined human breast cancer cells and successfully detected methylation changes between cancer and normal samples.
This experiment highlights exciting progress in epigenetic sequencing and nanopore technology. As this article illustrates, researchers are striving to understand methylation’s role in various health problems. Current methods for mapping methylation have shortcomings, particularly a harsh process resulting in DNA fragmentation. Thanks to machine learning and more comprehensive training sets, algorithms should become more sophisticated in cracking the code to cancer and other diseases. Perhaps accelerating the time to market, Oxford Nanopore is making its open source sequencing software available on Github.
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